24 May 2018

Preliminary Results FY18

Agenda

01

FY18 Review

Financial Review

Strategy & Outlook

Q&A

Tristia Harrison

Kate Ferry

Tristia Harrison

All

Full Year 2018 Review

Performance is on track; good growth and financials in line with guidance

03

Ruthlessly prioritise our core strengths

Less capital intensive priorities

Reminder of FY18 Strategy

Never been a better time to be the value provider of fixed connectivity

Value propositions in Consumer and B2B are working

Fixed Low Price Plans (“FLPP”) have resonance

Performance on track

− Good base growth in Consumer and B2B

− Strong Q4 performance

− EBITDA in line with revised guidance

Simplification in B2B; Full fibre (“FTTP”) plans on track

04

Sale of Direct B2B business

− TalkTalk plan to sell its direct B2B business to Daisy for £175m

− Transaction will impact Group EBITDA by c.£15m in FY19

− Direct business contains c.80,000 customers (c.17% of revenue)

− Underpins strategy to focus on our core, high-growth partner and

wholesale B2B channels where we are Britain’s largest provider of

wholesale broadband and have the fastest growing Ethernet base

− These customers will be served by Daisy but will remain on TalkTalk’s

network via a new wholesale agreement

− The proposed sale will further strengthen the balance sheet and

support continued investment in growth and FTTP

FTTP

− FTTP plans are progressing well

− Appointment of Chair, Paul Reynolds

− Appointment of CEO, Charles Bligh

− York roll out continues well

Financial Review

06

Item Guidance Actual

Net Adds 150k-160k 192k

EBITDA £230m-£245m £233m

Net Debt/EBITDA 3.0x 3.0x

Revenue (excluding Off-Net and Carrier) Growth +1%

Capex 6%-7% 7.7%

FY18 performance in line with guidance

Strong momentum on KPIs

07

Fifth consecutive quarter of growth

Churn at lowest ever levels

Nearly 70% of the Consumer base on fixed price plans

Strong momentum in fibre

Continued growth in Ethernet circuits in B2B

(9)(20)

(42)

22 20 26 37

109

Q1'17 Q2'17 Q3'17 Q4'17 Q1'18 Q2'18 Q3'18 Q4'18

BB Net Adds On Net Churn

1.5% 1.7%1.4% 1.5% 1.3% 1.2%

H1'16 H2'16 H1'17 H2'17 H1'18 H2'18

Fibre Net Adds

36 40

74 73 72 89 89 98

Q1'17 Q2'17 Q3'17 Q4'17 Q1'18 Q2'18 Q3'18 Q4'18

31 35 39 43 47 51

H1'16 H2'16 H1'17 H2'17 H1'18 H2'18

EFM & Ethernet Base

Total FLPP Base

602 993

1,272 1,621 1,843 2,029

Q3'17 Q4'17 Q1'18 Q2'18 Q3'18 Q4'18

EBITDA in line with guidance; reflecting investment in growth

08

FY18£’m

FY17£’m

Headline revenue 1,658 1,720

Headline revenue (excluding Carrier and Off-net) 1,564 1,555

Gross profit 884 953

Margin 53.3% 55.4%

Operating costs & SAC (651) (592)

Headline EBITDA 233 361

Margin 14.1% 21.0%

Headline profit after taxation 18 154

Headline EPS (Basic) 1.8p 16.2p

Dividend per share 4.00p 10.29p

* PY revenue has been adjusted to exclude MVNO revenue of £63m and PY EBITDA has been adjusted to exclude MVNO losses of £28m and restatement of £29m claims from non-Headline items to Headline

*

Radical simplification gives rise to one-off transformational costs

09

FY18

P&L

Cash

£97m

£73m

P&L− Exit mobile strategy - £33m

− MVNO operating loss - £13m

− Group organisational structure - £34m

− Network transformation - £17m

Cash− Relates to above P&L costs, as well as timing of final

Making TalkTalk Simpler (“MTTS”) payments

− Deemed consent receipt not included

Looking forward− Non-headline items, both P&L and cash, expected to

be lower year on year

Costs / Supplier compensation

10

FY14 FY15 FY16 FY17 FY18

Costs incurred in Headline P&L

Settlement claims booked in Headline P&L

Settlement claims previously booked in Exceptional items

Removal of MVNO losses from Headline numbers: +£28m impact to FY17 reported number (+£13m in FY18)

Matching supplier compensation and related costs in Headline numbers: +£29m impact to FY17 reported number

1% revenue growth year on year

11

£1,555m

£16m£11m

£14m

£1,564m

FY17 On Net Data Voice FY18

FLPP ARPU dilution and lower average Consumer base, offset by Fibre penetration and legacy base price rises.

Strong growth in Ethernet circuits (+8.3k) driving data revenue growth

Base growth in IP Voice

£26.84

£0.50£0.35 £0.29

£0.37

£26.03

FY17 FLPPDilution

Fibre & TVBoosts

VoiceUsage

Consumer/ B2B Mix

FY18

FLPP resonating with customers; short term ARPU dilution

12

Dilution effect of FLPP

Growth in Fibre base and uptake of TV Boosts

Continued decline in Voice usage

Higher mix of wholesale customers in the base

ARPU will stabilise in FY19

55.4%

1.3%

1.2%

0.2% 0.3%0.3%

53.3%

FY17 Suppliercompensation

FLPP Dilution Declining Off-net

Data Growth Carrier FY18

Simplified disclosure and FLPP take up effect year on year gross margin

13

Reduction in disputed network credits

FLPP ARPU dilution impact

Growth in high margin Ethernet base accretive to margin

Reduction in low margin Carrier revenue year on year

Investment in growth resulting in higherSAC & Marketing costs as anticipated

14

Planned investment in base growth

− Investment in volume

− CPAs continue to come down

Increased cost to serve

Network investment

Opex£437m

Opex£448m

SAC£155m

SAC£203m

FY17 FY18

£592m£651m

3.0x Net Debt/EBITDA in line with guidance

15

FY18£’m

FY17£’m

Opening Headline Net Debt (782) (679)

Headline EBITDA 233 361

Working Capital (50) (56)

Capital Expenditure (128) (133)

Operating Free Cash Flow 55 172

Interest & Taxation (46) (33)

Free Cash Flow 9 139

Non-Headline items (73) (75)

Acquisitions (8) (18)

Dividends (71) (150)

Share Issue 201 1

Net Cash Flow 58 (103)

Closing Headline Net Debt (724) (782)

Net Debt / EBITDA* 3.0x 2.2x

* As calculated for the purposes of the Group’s borrowings

Cash inflow of £58m for FY18

ARPU dilution and planned investment in growth has seen lower cash generation

Higher rate of interest on bond issued late in FY17

Dividend: Final FY17 dividend (5.00p) and interim FY18 dividend (2.50p)

Share issue raised £201m (net of expenses)

Illustrative FY19 Cash Flow

16

FY19 cash inflow

Lower year on year non-Headline items from simplifying the business

Direct B2B sale proceeds: £175m

FY19 net debt/EBITDA comfortably within all covenants

Balance sheet strengthened –supporting continued investment in growth and FTTP

FY18 NetDebt

15% EBITDAGrowth

Capex £110m Dividend£30m

Other * Non-HeadlineItems

FY19 NetDebt

Direct B2BSale Proceeds

Direct B2BEBITDA

Adjusted NetDebt

3.0x

* Other includes working capital, interest and taxation and acquisitions

17

Results and guidance published today are pre-IFRS 15 and 16 adjustments

We are making good progress on implementing IFRS 15

Finalising an automated system solution to enable opening balance sheet adjustment and ongoing reporting

We expect IFRS 15 to have a minimal impact on EBITDA (guidance unchanged)

Q1 results will be under IFRS 15

IFRS 16 will be implemented in FY20 – the group continues to monitor the practical implications within the Telco industry

IFRS 15 and 16

Exit the year with good momentum and a firm foundation for growth

Growth KPIs are encouraging

Significantly lower P&L and cash non-Headline items in FY19

Focus on cash

Stronger balance sheet

Confidence in FY19 outlook: 15% EBITDA growth

− Revenue growth from stabilising ARPU and larger average base

− WLA savings contributing to margin improvement

− Other significant cost reductions

EBITDA impact of removing Direct B2B business from FY19 is c.£15m

18

Our Plan

Our plan remains unchanged

20

Clear space for value challenger of fixed connectivity

Opportunity for a value provider of fixed connectivity as large today as ever

Customers consuming exponential data –with growth in OTT content viewing such as Amazon, YouTube and Netflix

Reliability of connection is therefore critical

Incumbents protecting premium bases –driving up industry ARPU’s

Clear space for value challenger

21

Simple, affordable and reliable fixed Broadband

Core Products

Voice

No price rises for the length of your plan

TV Mobile

Add-ons

£18.95 a month

for 24 months, includes line rental

£25 a month

for 24 months, includes line rental

Price certainty is working with customers; early re-contracting behaviour is encouraging

Focus on core, fixed connectivity has real momentum

We have invested in equalising the front and back-book

Short-term dilution impact on ARPU but higher proportion of base now in contract contributing to lowest ever churn

Early signs on out of contract behaviour are positive

− Number of customers re-contracting is encouraging

− Customer churn has been positive and below our expectation

− ARPU’s for those that re-contract are 2-3% higher

22

Stabilising ARPU

23

Further FLPP dilution (remaining out of contract base to recontract and new acquisitions contracting at competitive prices)

Re-contracts and new acquisition at higher price point

End of FLPP contract price rise

Fibre penetration and TV, Mobile and Call Boosts

Consumer : B2B base mix

Legacy out of contract base price rise

Material savings vs competitors, up to £468

24

FTTC (40)

BB + TV

£887

£861

£944

£944

£719*

n/a

£555

Starter TV & Unlimited Broadband &

Weekend CallsPlayer Bundle & Weekend Calls

£600**

£657**

£783

£1125

Unlimited Infinity 1 & Weekend

CallsVivid 100 &

Weekend CallsUnlimited Fibre &

No Calls

Unlimited Fibre (38Mbs) &

Weekend Calls Super Fast 1Fibre Unlimited

& No Calls

Sky Entertainment TV & Unlimited Broadband & No

calls

Copper £727 n/a £599* £577

£767

£464** £585*

Vivid 50 & Weekend Calls

Unlimited Broadband & No

CallsBroadband &

Weekend Calls

Unlimited Standard BB 17 +

No calls

Unlimited Broadband & No

calls

Unlimited Broadband &

Weekend Calls

£726* n/a£857

YouView TV + Unlimited BB

EE TV + Unlimited BB

TalkTalk Pricing Cheaper than TalkTalk More expensive than TalkTalk

Prices correct 22/05/18. 24 month cost comparison, Promotional prices based on nearest like for like packages, including connection fees and excluding vouchers. Standard price applies after contract ends. * 12month contract. ** 24month contract.

Select TV & Unlimited Broadband & No calls

Compelling (capital light) TV & Mobile offering underpinning churn reduction and stabilising ARPU

25

TalkTalk Business: A Re-cap

26

c.17%

Wholesale

&

Partner

Direct Over 1 million B2B customers – of which only c.80,000 come through direct channel

Real strength in indirect channel – Britain’s largest supplier of wholesale and B2B2C broadband

Providing simple, affordable and reliable connectivity to our Partners and Wholesale customers

Sale of direct B2B business allows us to focus exclusively on growing the indirect channel

No longer competing with our Partner and Wholesale customers in direct B2B market

Split of c.£600m B2B revenue

Comparable customer lifetime values in Consumer and B2B broadband

27

Consumer FLPP B2B Broadband*

Consumer FLPP customers come with higher ARPU

With much of the cost to serve outsourced, B2B broadband customers incur less customer service and billing costs, as well as lower SAC & Marketing

Overall EBITDA contribution of a Consumer FLPP and B2B broadband customer is broadly the same

Agnostic where growth comes from

Separately Ethernet has significantly higher revenue, margin and EBITDA

Revenue

Gross Profit

EBITDA

Revenue

Gross Profit

EBITDA

* B2B Broadband excludes high margin data products

Customer Lifetime Value

Network improvement on track and delivering for customers

28

●

The largest unbundled broadband and Ethernet network

750 exchanges upgraded to our new access network topology (ANT) − resilience cost− 4 x footprint increase for Ethernet

Introduction of High capacity bandwidth services (10Gb-100Gb) underway for delivery this year

Increased focus on product engineering with increased in-home diagnostic and testing capability

Network Technology

◑

◑

◑

43% year on year growth of core peak capacity implemented - maintaining zero customer congestion

We have extended our optical capacity with increased deployment of 100Gb technology

Largest upgrade and deployment of Netflix content caching in Europe

Core Capacity

New DLM, DNS & Parental controls fully deployed

Introduced cloud based analytics index covering network and last mile and in-home customer experience.

Self optimizing core network to improve resilience and performance deployed and on track for roll out this year

Network Systems

◑

◑

●

●●

Customer sentiment

29

Good improvement

Churn NPS

1.5% 1.7%1.4% 1.5% 1.3% 1.2%

H1'16 H2'16 H1'17 H2'17 H1'18 H2'18

(Source: GfK Customer Experience Tracker)

Much still to do Stable operation Improved connectivity

Cost efficiencies underpinning 15% EBITDA improvement

Attacking costs

Simplified strategy focusing on fixed connectivity

Capital-light approach to non-core activity

Radical shift to self-serve

Rigorous review of external spend and organisational structure

Regulatory tailwinds

− WLA savings for FTTC services

30

People sentiment; agile culture; value mentality

New Location

Building a Great Place to Work

Graduates and Apprenticeships

Colleague recognition

Diversity and Inclusion

Colleague recommendation

31

TalkTalk Group Reviews

Full fibre plans on track

FTTP plans progressing well

− Paul Reynolds appointed Chair

− Charles Bligh appointed CEO

− Wholesale agreements progressing

Plans progressing with next wave of locations for build in early 2019

York continues to deliver strong performance

− Penetration of first phase over 33%

− Outstanding customer advocacy; NPS +47

− Making good progress on next phase of build

− Encouraging network innovation to reduce construction cost – ducts, poles, MDUs, active cabinets

32

Outlook

Full year outlook

Headline revenue growth

Stabilising ARPU

Base growth as per previous guidance (more than 150k)

Continuing strong Ethernet growth in TalkTalk Business (TTB) consistent with FY18

Before adjusting for the impact of the Daisy transaction we expect to deliver 15% EBITDA growth in FY19 as a result of a larger customer base, stabilising ARPU, material WLA savings and other significant cost reductions

Final dividend of 1.5p consistent with new dividend policy announced at Q3

Completion of sale of direct B2B business to Daisy by the end of July and FTTP plans on track

34

Q&A